Trading up.

• Author: Singham, Shanker A.
• Position: Trade liberalization

AFTER DECADES of progress, the process of trade liberalization seems to be in danger of grinding to a halt. Both the political elite and average citizens express waning enthusiasm for freer trade. The World Trade Organization's (WTO) Doha Development Round, which seeks to improve trade terms for developing countries, has yet to produce significant breakthroughs and has now missed countless deadlines. Anxious publics, in developed and developing countries alike, perceive that liberalization and globalization have brought insufficient benefits. Rather than recognizing that such problems arise from domestic regulatory barriers to further liberalization, consumers fault global economic integration. When this misguided economic frustration finds political expression, publics elect populist candidates who promise some form of economic nationalism or mercantilism.

Venezuelan President Hugo Chavez is one leader who has successfully manipulated public preoccupations about "foreign exploitation" and economic insecurity. "We have buried Adam Smith", he triumphantly announced in 2006. Chavez may be at the forefront of the economic-populist trend, but he is hardly alone. Ecuador and Bolivia have notably taken turns towards economic nationalism, as have some of the developing countries in Eastern and Central Europe.

The leaders of developed countries may not have followed Chavez's lead in attempting to re-inter the long-deceased champion of free markets, but they too have embraced the rhetoric of economic nationalism. In France, President Nicolas Sarkozy has promised sweeping economic reform, although he has exhibited protectionist impulses in the past. As finance minister, Sarkozy approved of the government's disbursal of favors to French firms designated as "national champions." In the United States, several Democratic candidates have railed against the president's flee-trade agenda (describing themselves as supporters of "fair trade").

In all of these examples, both consumers and their leaders have failed to recognize that domestic economic liberalization, not higher barriers to trade, will spur the economic progress that, in turn, generates jobs and prosperity. When previously protected sectors of the domestic economy are exposed to greater international competition, it is true that specific groups of individuals--tied to relatively uncompetitive industries--may suffer. However, as long as these industries receive protection from foreign competition, consumers that purchase these industries' products must pay higher prices than they would in a more competitive market.

While freer trade can cause economic pain in the short run, international competition allows countries to specialize in the industries in which they have a comparative advantage in the long run. Ultimately, trade and specialization benefit a diffuse group of consumers by lowering prices of many goods and services. Trade--to quote Federal Reserve Board Chairman Ben Bernanke--allows countries to "transform what [they] have into what [they] need or want under increasingly beneficial terms." Trade liberalization, in spite of the economic dislocations it may create, is not a zero-sum game. The entry of foreign firms, products and services into the domestic market--an inevitable consequence of trade liberalization--need not be feared: It benefits the average consumer.

Free or Fair?

YET BOTH economic nationalists (some of whom are both against free markets and free trade) and fair traders are not convinced that freer trade is a desirable goal. Both concentrate on trade liberalization's perils, though fair traders often frame the issue in social-justice terms, rather than simply positing a link between restricted trade, job protection for domestic workers and a healthy domestic economy. Free trade's opponents note that a purely market-based approach to trade will have "unfair consequences" if domestic regulations--such as labor rules, internal taxes or laws affecting international distribution--between the trading partners differ. Unfortunately, the fair-trade approach is not the cure-all that its advocates claim it to be. Fair-trade policies undercut comparative advantage, the foundation of trade theory. If trade is only "fair" when domestic regulations in developing countries are...